Chapter 4

Economics of the Environment

R. Quentin Grafton and John C.V. Pezzey

1. Nature and Origins of Economics

Nature

Since our earliest ancestors people have been making economic decisions. These

decisions involve choices and trade-offs as to how to best use time and resources

among competing alternatives. For a Palaeolithic hunter-gatherer the choice could

have been between hunting for a deer, fishing for salmon or searching for edible roots;

while for an Egyptian Pharaoh it may have involved choices over spending on the

standing army, building a temple or increasing grain storage facilities.

Today our choices differ, but the need remains to consider alternatives. These include

both everyday choices like buying a good (such as bread) or service (such as a

haircut) from a shop, and life choices such as what job to take or where to live.

Regardless of who we are, we all face scarcity: that is constraints or limits on how

many desirable things in life we can have, because of limits to our time, our current

income, our accumulated wealth, etc. Economics, in its most basic form, is the study

of how given these constraints, people make their choices, allocate their resources,

and distribute the results.

Most of what economists study is the quantitative trade-offs of ‘commodities’(here

goods and services, although it also includes natural resources like coal) that people

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exchange with each other, usually indirectly through markets. Economics seeks

numerical measures of the goods and services which people value, and the means of

producing them, using units like hours of labour or megalitres of water. It also

presumes that people make their choices so as to maximise their wellbeing or ‘utility’.

Mainstream economics is much more concerned about the goods and services that

money normally measures than about the environment. A key role for the economics

of the environment is to try to value environmental services often overlooked or

undervalued by the market place. In so doing, it helps ensure that the part nature plays

in providing us with sustenance is given proper consideration. It also takes it a step

further by analysing the ways human activities and actions can help address the use

(and abuse) of the environment in ways that improve environmental quality and well-

being.

Many introductions to economics ignore time or place as factors that affect our

choices. Surprisingly, given that choices frequently involve moral dilemmas and

ethical questions, superficial treatments of economics also fail to consider equity

issues at either an individual or societal level. Thus, students enrolled in their first

course in economics may mistakenly believe that all economics is ahistorical,

ageographical and amoral. The reality is that although these issues are not given the

attention they deserve, as far back as Adam Smith in the eighteenth century, some

economists have taken a broad or holistic perspective to analyse and explain human

behaviour and outcomes. To help understand what is economics, and what it offers to

understanding the world around us, we will briefly explore its origins.

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Origins

Economics as a separate discipline usually traces its roots back to the work of Adam

Smith and, in particular, his classic text, An Inquiry into the Nature and Causes of the

Wealth of Nations first published in 1776. Although this mammoth work included

digressions into the value of silver over four centuries and a history of education in

the Middle Ages, the basic question addressed is clear from the title: How had some

nations become so much wealthier than others? Investigating this led Smith to study

individual incentives, prices and wages, property rights, social institutions, trade and

economic growth. Although he was by no means the first writer to address these

issues, he was the first to put them all together and attempt a comprehensive

prescription of how to promote wellbeing. Many of his ideas were subsequently

developed and extended by others and form the basis of most of the economics used

today.

One of Adam Smith’s best known ideas is the division of labour: that by dividing up a

given piece work into many tasks, each done by a separate, specialist labourer, the

productivity of a given number of people is often increased, through skills acquired by

greater repetition. Another is that markets give benevolent guidance to groups of

purely self-interested individuals and may be said to be led by an invisible hand to

promote society’s interest (Smith 1776, Book IV, Chapter 2).

For a century or so after Smith, the main focus of ‘classical economists’ like Malthus,

Ricardo and Marx was on the overall development and growth of nations. Central to

this was the question rejuvenated in the 1980s by the debate on sustainability: can

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prosperity increase forever, or are there limits? In answering this, classical

economists paid much attention to natural resources, particularly agricultural land –

most famously in Malthus’ pessimism, so far misplaced, that population growth

would be bound to outstrip food production.

In the late nineteenth century, attention shifted to individual markets within the

economy, known as microeconomics, rather than the economy as a whole, known as

macroeconomics. An intrinsic part of this shift was the discarding of any special role

for environmental resources, and the development of marginal analysis that focuses

on how ‘marginal’ units of consumption, production or other activities ─ meaning the

last or extra unit consumed or produced ─ affects individual economic welfare.

Marginal analysis uses mathematics to model individuals’ (agents’) actions in an

economy as being subject to precisely defined laws of supply and demand, much as

Newton modelled a planet’s motion in a solar system as subject to precisely defined

laws of gravity. This crystallised in the neoclassical approach to economics that has

become ‘mainstream’ since the 1940s, and which emphasises the benefits of markets

and competition to help achieve Adam Smith’s ‘invisible hand’ result.

Marginal Analysis

Marginal analysis provides a framework for explaining a great deal of economic

behaviour, as people often act as if they maximise their wellbeing (‘utility’) by

consuming or producing up until the point where the marginal benefit of the last unit

equals the marginal cost of consuming or producing it. For example, a firm would not

ordinarily choose to produce a good beyond the point that its marginal benefit (usually

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the price it receives for selling each unit of the good) exceeds the marginal cost of

producing it. This can be visualised in Figure 1 for the case of an owner-operator firm

(supplier), competing with many similar suppliers to sell an identical good to a single

consumer (demander).

A

B C

price of good,marginal benefit

&marginal cost

quantity of goodproduced & consumed

per year

marginal benefitof consumption =demand for good

marginal cost ofproduction =

supply of good

0

D

Figure 1: Marginal Analysis and Equilibrium

The price that consumers are willing to pay for one unit of the good falls as the

quantity of the good produced rises, because each additional (marginal) unit gives less

benefit or value to consumers, and hence is worth a lower price. So the ‘demand

curve’ slopes downwards, with the maximum demand price that the consumer is

willing to pay being $A per unit when no units are being consumed, and with the good

having no marginal benefit once C units are being consumed. By contrast, the ‘supply

curve’ or the marginal cost of supplying (producing) the good rises as the amount

produced rises. This is because the owner-operator places an increasing value on

leisure time, and the time available for leisure decreases, the longer the hours that the

owner works.

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The preferred level of production for the firm is point B where the marginal benefit

(i.e., price) of production exactly equals its marginal cost. Quantity B and its

associated price D represent a demand-supply equilibrium for the firm because the

owner has no desire to change the amount produced. Because prices are determined

by demand and supply for the marginal unit, they do not reflect the total value of all

consumption of the goods in question. For example, the total value of all fresh water

resources consumed is infinitely greater than the value of all diamonds consumed; but

because water is so much more plentiful than diamonds, its price (marginal value) per

kilogram is much lower.

2. Economics of the Environment

The economics of the environment as a sub-discipline has developed within only the

last 100 years. A landmark work by Pigou (1920) introduced the concept of a

technological externality, whereby a decision maker acts in a way that either improves

or harms the wellbeing of others, but these effects are neither considered by the

decision maker, nor ‘priced’ or accounted for in the market place. Thus a factory that

emits polluting wastes into a river that harm the health of residents downstream is

causing a negative technological externality.

Pigou’s suggestion to remedy or internalise the externality, and reduce the excessive

level of pollution it causes, was to tax or charge the factory an amount per unit of its

emissions equal to the harm that an extra unit of emissions causes to downstream

users. In principle, if the per unit pollution tax were set at the correct amount and

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equal to this marginal level of harm to downstream users, the ‘efficient’ level of water

pollution would result. Efficient refers here to a level of pollution where the marginal

willingness of users to pay for reduced pollution exactly equals the marginal

willingness to pay of the firm to increase its emissions. But an efficient level of

pollution may be very inequitable, as it fails to consider who bears the costs (or enjoys

the benefits) of actions that affect others. Many economists, however, avoid debates

about equity, and often focus solely on achieving efficiency.

Externalities

The negative externality considered by Pigou and the ‘efficient’ level of pollution can

be visualised in Figure 2.

marginal social cost

supply = marginal privatecost

demand = marginal privatebenefit = marginal social

benefit

q* q'

marginal benefitsand costs

quantity of good produced &consumed per year

marginalexternal

cost

socially efficient quantity

privately efficient quantity

Figure 2: Privately and Socially Efficient Levels of Production with a Negative

Technological Externality

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The production or output of the firm (but not its emissions) in Figure 2 generates

value to others (it could, for example, be producing hospital syringes), but each unit of

output also produces a fixed amount of emissions. When seeking an efficient level of

pollution, we seek a balance between the value of the output to society, and its total

cost to society. The value of this output to those consuming it is represented by its

price, which equals the marginal private benefit. If the price of the product also

equals its value to society, then the price will also be its marginal social benefit. We

would expect that the more is produced and consumed, the less hospitals would be

willing to pay for the product, as there are only so many syringes that even a hospital

can use. So the marginal private benefit falls as the quantity of output produced and

sold rises, again giving a downward-sloping demand curve.

Also as in Figure 1, the marginal cost of production, defined as the marginal private

cost of the output, is rising in Figure 2; that is, the supply curve is upward-sloping.

Here this is because the greater use of machinery or higher labour hours imposes

higher per unit costs in the form of more regular machine maintenance or overtime

rates for workers. Each unit of production, however, results in a cost for downstream

users that is defined as the marginal external cost, so-called because it is a cost that

the firm normally treats as ‘external’ to its financial calculations. The sum of the

marginal private cost and the marginal external cost equals the marginal social cost

per unit of output.

In the absence of a pollution tax, or any other measure to control pollution, the firm

would choose to produce q' units, or be at the privately efficient point where its

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marginal private benefits equal its marginal private costs of production. From

society’s perspective, however, the preferred level of output is q*, or the socially

efficient point where marginal social benefits exactly equal the marginal social costs

of production.

Measuring marginal external costs in monetary units, so as to know where q* might

be, is an important part of the economics of the environment. Another part is

designing mechanisms or institutions to move from the socially undesirable

(inefficient) point q' to the efficient point q*. Despite Pigou’s suggestion of using

emission taxes, governments have mostly opted for regulations or controls that simply

prohibit firms from polluting beyond a fixed amount. More recently, the idea has

become popular that tradeable property rights (say equal to a level of emissions that

corresponds to output level q*) can be created for pollution. The price paid for such

rights to pollute would be a cost to polluting firms that gives them a financial

incentive to reduce emissions. Both taxes and tradeable rights amount to someone

(the government, and/or private individuals) effectively ‘owning’ (commoditising) an

environmental resource that was previously unmanaged. In principle, such market

mechanisms or economic instruments of environmental management can increase

cost-effectiveness, by reducing the overall costs of any targeted reduction in pollution,

even when marginal external cost and hence the socially efficient pollution level are

unknown.

Resource Economics and Ecological Economics

The economics of the environment goes far beyond the issues of pollution control,

and encompasses the challenges of natural resource management (such as the

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economically desirable level of mining or harvesting) commonly called resource

economics; sustainable development (such as the choices we all need to make to

ensure a desired level of well being for the future); and non-market valuation (such as

the value we can ascribe to a nature reserve that is provided free to the public, or the

values of environmental assets to people that do not physically use them). A common

characteristic of all these approaches is that most analysis focuses on the present and

the future, but not the past. Understanding the history of how we arrived at the

current situation or circumstances is often either ignored, or considered as very much

of second-order importance by economists.

To be fully comprehensive, the economics of the environment should include some

more awkward aspects, such as threshold effects (sudden, maybe irreversible jumps)

in nature, possible limits to substitutability between manufactured inputs and outputs

and ecological services, the satiability of consumer wants and the ethical questions

raised by unequal environmental impacts on different parts of society. These aspects

call into question the marginal techniques outlined above, and have led some people

to identify a distinctively different, but inherently diverse, branch of economics called

ecological economics. This sub-discipline takes a broader approach to problem

solving, often using techniques avoided by most economists, in particular

measurements in physical units like land area, mass or energy, rather than money.

3. Concepts, Controversies, Contributions and Perspectives

As a “Johnny-come-lately”, the economics of the environment has not always

received the attention it deserves. Up until the early 1970s, major fields of study in

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economics such as international trade and economic growth completely ignored the

environmental dimension. Thirty years ago almost all the theoretical models and

empirical analyses failed to consider the relationships, connections and causal loops

between the environment and the economy. Fortunately, this situation has changed

dramatically. Beginning with the first oil price shocks in 1972-73 that led to a

widespread concern over scarcity of non-renewable resources (especially fossil fuels),

economists have paid much more attention to resource and environmental issues.

More recently, global environmental problems such as stratospheric ozone depletion,

climate change and biodiversity loss have forced many economists to face the fact that

the economy and the environment interact in important ways.

New ways of thinking about the connections between the environment and economy

have also been stimulated by the debate over whether economies are on a sustainable

path, and to what extent we can substitute between produced or manufactured capital

and outputs and natural resources and ecological services. This interlinked debate on

sustainability and substitutability, and a plethora of studies on the effects of economic

growth and the environment and many other economy-environmental issues, have

helped make the economics of the environment today a well-established field of study

within economics.

Concepts

The economics of the environment incorporates many of the concepts and modes of

analysis used in other areas of economics. First and foremost, it starts with the

premise of human supremacy, in the sense that almost all analysis is anthropocentric,

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and seeks ways at improving outcomes for people. This does not imply that other

organisms are unimportant ─ in fact the opposite is the case ─ but rather that their

only importance is to generate, directly or indirectly, human values. For example,

economic analysis may show that blue whales have a much greater value left

unmolested (mainly the ‘existence value’ that people get from just knowing the

largest living animal continues to live), than if they were hunted for their worth as

meat and oil products. This comparison, however, would be purely from a human

perspective: only values to people are counted.

Given the tendency for economists to optimise and analyse, the economics of the

environment shares with mainstream economics the almost universal assumption of

rational behaviour, that is, that people consistently do the best they can (‘maximise

their utility’), given the constraints they face. From this perspective, human

behaviour can be analysed by specifying an objective function or set of goals, and the

constraints that decision makers face in choosing their most desired or optimal

decision. When specifying objectives, economists will often assume non-satiation or

the notion that people always prefer more to less (though as already noted, ecological

economics may depart from this). Thus, when specifying that firms maximise their

profits, a standard economic assumption is that firms always prefer more profits to

less.

Another important set of concepts in the economics of the environment relates to

dynamic analysis, or the study of how variables and outcomes change over time. This

is particularly important in resource economics, where resource stocks typically

change from one period to the next due to flows of natural growth and harvesting.

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The concepts of stocks and flows also apply to environmental amenities and the

ability of the environment to assimilate wastes, and have been used to construct

models of the feedbacks between the environment and the economy.

A common feature of dynamic analysis is the discounting of benefits and costs

whereby a dollar (or whatever the money metric) received in the future is worth less

to someone than a dollar received today. People do discount the future, but it can lead

to some perverse results. For example, when comparing alternatives where one

choice is very high returns today and zero or even negative returns in the future, and

another choice is small or moderate returns forever, the former may dominate even at

low rates of discount if the assumed objective is to maximise the discounted net

returns over time. In other words, suppose a technology existed to triple world net

output for the next 200 years by extracting energy from the sun at a low cost, but in

200 years time it would result in the sun exploding (Page, 1977 p. 250). Simply (and

inappropriately!) discounting the increased output at anything more than 0.2% per

year can be shown to recommend using the technology, because the end of civilisation

that the explosion causes is so far in the future (and is thus heavily discounted).

Contributions

The economics of the environment offers a number of important contributions to

understanding nature. Foremost is its ability to link human systems to environmental

systems via individual and collective incentives. For example, if there are no formal

or informal property rights to an environmental asset, so that anyone can use it as she

or he sees fit without constraint, then there will arise the so-called ‘tragedy of the

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commons’. This is a form of overuse or even extinction of the resource which may be

succinctly described as ‘everybody’s access, nobody’s property’. By understanding

and offering solutions to misspecified property rights and incentives, economics offers

a powerful framework for managing natural resources better.

The property rights literature has also been used to develop innovative instruments or

mechanisms for pollution control. For example, coal-fired electric utilities in the

United States operate under a “cap and trade” program where they have fixed amounts

of sulphur dioxide in the form of tradeable pollution permits that they are allowed to

emit per year. To help ensure that the overall costs of emission control are minimised,

utilities that face a high cost of reducing emissions can buy the right to emit sulphur

dioxide from utilities with lower costs. The result is that for a given total emissions

level, overall control costs are reduced. This is because high cost utilities are able to

buy emission permits for a price lower than it would have cost them to reduce their

own emissions, and low cost utilities undertake the emission control. Such an

approach works well where emissions are uniformly dispersed, so causing identical

damage regardless of their geographical origin, and avoiding the creation of localised

‘hot spots’ of excessive pollution.

The economics of the environment has also provided a framework for improved

natural resources management in fisheries, forests, and water use, and also in the

extraction of non-renewable resources. Bioeconomic analysis incorporates biological

models of how different living resources grow into economic models. Dynamic

optimisation ─ maximising the discounted sum of net benefits from now until some

future time horizon ─ allows resource managers to consider various alternatives and

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scenarios for the future, and develop operational strategies. Such approaches, coupled

with risk assessment, provide a powerful set of tools to improve overall natural

resource management. By incorporating the human dimension in resource

management, economics provides an understanding of how to address management

problems that arise from resource use.

A major contribution towards understanding the environment is the development of

detailed models that link economic systems to environmental outcomes (and vice

versa). These models come in many different forms, and include studies that relate

changes in national income to environmental degradation, studies that evaluate input

intensities (ratios of inputs, such as energy use, to gross production or output) and

emission intensities (ratios of emission to gross production) over time and

comprehensive models that link sectoral activities in an entire economy to

environmental services. These approaches have been used, for example, to develop

scenarios that assess the effects of climate change (global warming) on economic

activity. Such models help to assess the trade-offs between the present and the future,

such as the costs associated with business-as-usual management versus proactive

decisions to slow down climate change.

Another important development in the past 30 years in the economics of the

environment is non-market valuation. It involves several different methods that try to

place a value or ‘price’ on environmental assets. One of the approaches, called

hedonic analysis, tries to relate decisions people make over purchased goods and

services to environmental quality. For instance, a lower bound estimate of the costs

of air pollution can be made using economic models that account for differences in

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prices for similar houses in neighbourhoods with different levels of ambient air

quality. In another approach, a lower bound on the value to users of a lake for

recreational purposes can be found by asking them the travel costs they incurred in

getting to the site. In this travel-cost method the user’s value is deemed to be at least

as much as his or her costs of getting there.

For environmental assets that are not directly used, stated preference techniques

(mainly two survey methods called contingent valuation and choice modelling) have

been applied, whereby individuals are given information and asked to respond to

questions that elicit their values, such as their willingness to pay to conserve

wilderness areas. These approaches are not without their flaws, but have proved very

important in helping make decisions about the use (or non-use) of environmental

assets.

Controversies

As with any discipline, practitioners have debated the validity and efficacy of various

methodologies and methods. A key debate in the economics of the environment that

goes back to the very beginnings of the sub-discipline is the appropriateness of

discounting the future. Some have argued that discounting places a lesser weight on

future generations than the current generation, and is thus ‘morally reprehensible’. In

response to this criticism, economists have developed approaches whereby the

discount rate varies over time and often undertake analyses with a range of discount

rates.

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A more recent controversy has revolved around the ability of surveys that elicit stated

preferences to provide meaningful values. These critiques and cumulative experience

have led researchers to refine the approaches to yield more robust estimates of values,

although critics still remain sceptical as to what values are being measured.

A fundamental philosophical debate also exists over the ability of human ingenuity

and technical progress to address environmental problems. An extreme view is that

provided the incentives exist for developing innovations, technologies will be

developed to address the full range of environmental challenges. The contrary view,

seldom expressed by economists (other than ecological ones), is that nature has

fundamental thresholds, and there is no assurance that humanly devised systems can

overcome the problems these cause, especially those with long time lags between

cause and effect. Most economists take a view in between these perspectives: they

acknowledge the uncertainties and difficulties with addressing environmental

problems (especially threshold effects) after they have arisen, but also recognise that

substitutions and innovations in the past have proved effective at mitigating

environmental damage. This debate is also mirrored in controversies over whether

economic growth in a country is generally good for the environment. Such

controversies have been stimulated by studies claiming to show an ‘inverse-U’

relationship between environmental degradation and per capita income, where

environmental damage first increases and then declines as a country gets richer.

Questions of measurement and environmental performance have arisen regarding the

system of national accounts that is the database for most macroeconomic policy. So-

called ‘green’ accounts have been developed that primarily consist of ‘satellite’

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accounts documenting changes in quantities or stocks of important natural resources

such as forests or water. In addition, expenditures on the environment, such as

pollution control costs, are often separated from traditional accounts so as to permit

further analysis. A much more controversial development has been the development

of alternative indicators of overall national welfare, or whether or not national

development is sustainable, that include the ‘genuine progress indicator’ and a

measure for ‘genuine savings’. Although such measures are now regularly calculated

for many countries, they are still viewed as ‘sideshows’ by many economists in

comparison to traditional indicators such as gross domestic product.

Finally, in common with many other fields in microeconomics, the presumption that

governments always act to improve social welfare has been comprehensively

challenged by many studies of the political economy of environmental policies.

These have shown the importance of lobby groups, political self-interest and even

outright corruption in explaining which policies are actually adopted.

4. Methods and tools of analysis

The main methods and tools used by the economics of the environment, with

examples of their use, are detailed below.

Primary data collection used to be almost exclusively done by various types of survey

instrument, used either by regular (and often mandatory) government or firm data

gathering, or by economists researching a particular issue. Examples of the former

would be government data on annual depletion and discoveries of mineral or

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hydrocarbon reserves, or a firm’s reports of their own emissions as part of

‘environmental accounting’. An example of the latter would be a contingent valuation

survey designed specifically to enable use and non-use values of some threatened

wetlands to be measured in monetary units. An example of both would be asking

firms how much they spend on ‘pollution control’, a question which might be posed

either regularly by a government agency, or as part of a one-off research project.

However, in the last decade or so there has been an increasing amount of primary data

gathered by laboratory experiments, where people make behavioural choices, in

return for modest amounts of money, in a controlled laboratory situation that mimics a

market transaction of interest. An example would be an experiment might be used to

test how people would bid in various types of auctions of tradeable pollution rights.

Secondary data collection is mainly by electronic transfer or physical copying and

entering of existing survey data held by government and firm sources. It is the only

form of data collection that many mainstream empirical economists ever do, though

by comparison, environmental economists need to collect primary data more often.

Examples of secondary data would be consulting annual economic reports of national

statistical agencies in a library, and downloading a spreadsheet of data on many

countries’ economic growth and environmental performance from a World Bank

website.

Statistical analysis of primary and secondary data sources is the mainstay of much

empirical analysis in the economics of environment. Like mainstream economists,

environmental economists need to use special statistical techniques called

econometrics to deal with the many economic data series that show rising or falling

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trends over time, without a clear direction or even existence of any causal connection

among them. For example, population, GDP per capita and the number of cars per

household are all typically rising, and econometric analysis is needed to assess the

separate contributions of each factor to rising air pollution in cities. Another example

would be to analyse the effects of income per capita and various social factors on

measures of overall environmental quality, to see if any inverted-U relationships exist

between income and environmental degradation.

Mathematical modelling, with emphasis on dynamics, is a key technique for trying to

understand the inner workings of economy-environment interactions. Often statistical

analysis will show that parameter A influences factor B, but only mathematical

modelling can explain why it does so. Ideally models would use parameter values

obtained from primary or secondary sources to produce an empirical result about the

real world, but much mathematical modelling in economics is purely theoretical with

no empirical testing, and environmental economics is no exception. Examples of

mathematical models abound for both microeconomic questions, such as the optimal

time path for planting and felling a forest, or for extracting ore from a mine; and for

macroeconomic questions, such as recalculating national income measures to include

the effect of environmental degradation and resource depletion.

Lastly, cost-benefit analysis (CBA) is a hybrid of the above techniques, designed to

quantify in money units the net benefit or cost of a particular project, such as a new

environmental regulation or a new emission control investment. A key aspect of an

environmental CBA is the choice of non-market values to use, and the decision of

how many second- and third-order effects to include in the analysis. For example, in

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evaluating the non-market effects of a road construction project, does one include just

the reduction in travelling time of existing drivers, or the compensating increase in

congestion resulting from new drivers taking to the roads once travel is faster?

Further reading

Blaug’s (1997) history of economic theory succinctly explains the main contributions

of Smith and other great economists. Tietenberg (2002) is an introductory textbook in

environmental economics that has a wealth of empirical and institutional detail,

especially concerning the USA. We recommend van den Bergh (1996) as a good

introduction to ecological economics, and Garrod and Willis (1999) as an excellent

first guide to environmental valuation.

References cited

Blaug, Mark (1997). Economic Theory in Retrospect. 5th edition. Cambridge

University Press: Cambridge, UK.

Garrod, Guy, and Kenneth G. Willis (1999). Economic Valuation of the Environment:

Methods and Case Studies. Edward Elgar: Cheltenham, UK.

Page, Talbot. (1977). Conservation and Efficiency: An Approach to Materials Policy.

The John Hopkins University Press: Baltimore.

Pigou, Arthur. C. (1920). The Economics of Welfare. 4th edition published 1932.

Macmillan: London.

Smith, Adam (1776). The Wealth of Nations. Published in 1938 by The Modern

Library: New York.

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Tietenberg, Thomas H. (2002). Environmental and Natural Resource Economics, 6th

edition. Addison-Wesley: New York.

van den Bergh, Jeroen C. J. M. (1996). Ecological Economics and Sustainable

Development : Theory, Methods, and Applications. Edward Elgar:

Cheltenham, UK.

We are grateful for the helpful comments and suggestions of Richard Damania and Jo

McAllister.